Lull in 5G Implementation Calls Out to Investors
Cisco Systems (CSCO), reported dreadful financial results last week. The San Jose, Calif. maker of networking gear is feeling the pinch of slow orders from carriers contemplating huge 5G systems.
From semiconductors to optical equipment and software, the order delays are causing weakness in all of the major 5G stock groups. Naysayers argue the hype is finally meeting with reality.
But they’re wrong. 5G is the future. Not just for communication, but for technology as a whole.
5G is a world without wires, cables or compromises.
It will bring blazing fast connectivity with low latency, or lag. In some cases, that might be 1,000x faster than the downloads speeds you’re currently getting on your smartphone, and several hundred times faster than your home Wi-Fi.
Imagine lifelike virtual and augmented reality, city infrastructure optimized for energy efficiency, factories made more productive with preventative maintenance, rural hospitals improved with robotic surgery, and connected and self-driving cars making highways safer.
5G isn’t just the next generation of a wireless connectivity. It is the foundation for the first generation of truly smart things. Billions of connected devices will begin communicating at a machine level.
There are some short-term challenges. For a long time, cable, phone and internet providers have had a last-mile problem: They lacked the means to apply upgrades. Smart engineering brought more robust networks that scaled better. Unfortunately, getting all of that goodness to homes and businesses was still difficult. Crews of workers had to break up concrete to lay fiber optic cables. Technicians had to drill holes through walls.
The implementation of 5G will face some of these challenges, since it isn’t merely an evolution of 4G. It’s something very different. The rollout will mean new antennae systems, switches and other hardware. And it is going to be extremely expensive.
Still, it’s an epic opportunity for investors to get in on the ground floor.
Accenture (ACN), a global consulting company, estimated in 2018 that telecommunication companies could spend $275 billion through 2025 getting their networks up to snuff.
That’s only thin end of the wedge, according to February research from Greensill, the world’s leading non-bank provider of working capital. Analysts see telecom infrastructure spending surging to $1 trillion, with an additional $1.7 trillion needed for Internet of Things deployments.
Given the expense and complexity, telecoms are understandably cautious. It’s some of the resistance Chuck Robbins, chief executive of Cisco, is experiencing first hand. Many carriers are delaying plans as they digest political upheaval in Britain and the ongoing U.S.-China trade war, according to a report from the Financial Times.
However, delay is not curtailment. Ultimately, carriers may have no choice.
Management consulting firm McKinsey & Co. predicted in a Feb. 2018 report that telecoms in many countries must upgrade to 5G because their current business models are unsustainable. Network traffic is overtaxing existing cell towers, leading to poor performance. Analysts suggested adding capacity with new small cell networks.
Crown Castle International (CCI) is one of the largest U.S. operators of cell phone towers and small cell networks supported by fiber. The business, operated as a real estate investment trust, looms over the segment with 40,000 towers and 87,500 miles of fiber.
That kind of massive scale is a huge advantage. Same for its top big-cap rivals, American Tower (AMT) and SBA Communications (SBAC).
Crown Castle, based in Houston, has been around since 1994. In 2007, managers began to focus exclusively on corporate strengths. They doubled down on the United States. They began to aggressively expand the business footprint. They used leverage.
The strategy was prescient. It was founded on the idea that Crown’s collection of towers, small cells and fiber networks would prove indispensable as carriers brought more devices, machines and things online.
Today the company gets about 84% of its revenues from AT&T (T), T-Mobile (TMUS), Verizon (VZ) and Sprint (S). Because cell tower infrastructure is limited, major carriers compete fiercely for capacity.
And building super valuable small cell networks, like the radio equipment becoming ubiquitous on city streetlamps, shop rooftops and tall buildings, is less fragmented than you might think. Crown is dominating that market by forming relationships with municipalities. It now has properties in every leading market in the U.S.
Sales reached $5.35 billion in 2018, a 25% increase year-over-year. Crown managers also raised guidance for 2019, citing tight markets and rising rents, the dividend yield is 3.5%. In the second quarter of 2019, Crown reported $1.2 billion in revenue, a year-over-year increase of 6%.
The stock has also been a big winner, rising 27% in 2019. But the best is yet to come.
5G isn’t just hype. It’s the beginning of a world with smarter, more interconnected things. Crown is cornering the market on the infrastructure needed to make that happen.
Growth investors should consider buying the shares into any weakness.
Best wishes,
Jon D. Markman
P.S. If you’re interested in learning more about the 5G market, keep an eye on your inbox for a special notice from me. That’s because I will go in depth on the $12.3 trillion 5G boom … and NAME the one massive 5G opportunity no one sees coming.
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